When Option One Mortgage Corp. and several other out-of-state mortgage lenders suddenly stopped making loans in Rhode Island this month, it appeared to confirm the industry’s worse fears — that a new law designed to protect borrowers from predatory lending was driving business out of Rhode Island.

But those fears appear to be unwarranted. The pullout, it turns out, has more to do with the state’s “emergency regulation” on predatory lending, say regulators and mortgage industry representatives, than any opposition to the predatory-lending law itself.

Rhode Island’s Home Loan Protection Act, which became effective Jan. 1, is designed to protect borrowers from predatory practices by setting restrictions on how lenders collect fees and points on “high-cost” loans. The law applies to mortgage companies with state licenses, or affiliates of big, financial companies, which fall outside federal laws.

Borrowers with weak credit often depend upon “sub-prime” lenders such as Option One to purchase or refinance a property. So if such companies stop making loans in Rhode Island, the state’s mortgage brokers — already experiencing a downturn in the market — begin to worry that business will all but dry up.

But the state’s predatory-lending law is not the problem, according to one official at California-based New Century Mortgage Corp.

“The Home Loan Protection Act didn’t have anything to do with” the company’s decision to stop lending in Rhode Island, said New Century’s senior vice president for enterprise risk management, Marc Loewenthal. “It was really the emergency regulations. … The time frame was just too short … to get into compliance.”

Last week, hearing concerns from mortgage industry representatives about the new regulations, the state Department of Business Regulation extended the deadline for complying with certain regulatory requirements until March 1.

The following Wednesday, New Century resumed lending in Rhode Island.

“There are some technical issues in the regulations that need to be tweaked,” said DBR’s associate director and superintendent of banking, Dennis F. Ziroli. “It’s a very, very complex regulation. … Is there some confusion? Yes. And will [it] be addressed? Yes.”

Among the concerns raised by the mortgage lenders are how state regulators define a high-cost loan and the legal implications of a unique requirement in Rhode Island’s regulations requiring borrowers to sign disclosure statements stating that they understand and accept the loan terms.

“The statute is ambiguous,” Ziroli said, so regulators looked to federal rules as well as a report by the state’s predatory-lending commission for guidance in interpreting the law.

The department plans to hold public hearings on the regulations early next month, before issuing final regulations.

Rhode Island is one of about 30 states in the country, including Massachusetts and Connecticut, that have adopted predatory-lending laws.

When Massachusetts enacted its own statute, in 2004, some mortgage lenders threatened to pull out, said Massachusetts state Rep. John F. Quinn, D-New Bedford, who sponsored the legislation while he was chairman of the State Banking Committee. “But in the end,” Quinn said, “everyone is still writing in Massachusetts.”

Among them is Option One. The California-based mortgage company is the dominant lender in Rhode Island to borrowers with credit problems. Last year, Option One originated more than 3,200 sub-prime loans in Rhode Island, or about 5 percent of the state’s sub-prime market, according to the Mortgage Bankers Association in Washington.

On Jan. 9, Option One sent out a “compliance alert” stating that it had “temporarily suspended the origination and purchase of all owner-occupied loan transactions if the subject property is located in Rhode Island.”

The Option One bulletin stated that the company’s “difficult decision” was due to state regulators’ emergency rules, and noted three areas of concern relating to disclosures and interest-rate calculations in the regulations.

Other out-of-state mortgage companies that stopped lending in Rhode Island since the new regulations became effective are Argent Mortgage Co., Provident Funding Group and Flex Point Funding Corp., according to a Providence lawyer and board member of the Rhode Island Mortgage Bankers Association, James H. Hahn.

“The Mortgage Bankers [Association] is working diligently to provide input to the DBR” about their concerns, Hahn said. “None of us want to see predatory lending. And the statute reflects a compromise among representatives of the mortgage banking industry and proponents of restrictive legislation to protect borrowers from predatory lending.”

California-based Provident Funding Group has stopped all mortgage refinancing for properties in Rhode Island since enactment of the statute. But the law itself was never the issue, said Elisa M. Pollard, a closing attorney in Johnston who represents Provident. “It’s the way that the new regulation is written,” she said.

The predatory-lending law itself is not the issue, Pollard said, noting that Massachusetts has a similar law, “and they still do business in Massachusetts.”

Option One and other lenders appear to be reacting to “inconsistencies” in Rhode Island’s regulations, said Evan Fuguet, a lawyer for the North Carolina-based Center for Responsible Lending, which has been spearheading a national push to get states to enact predatory-lending laws. The problem amounts to a “technical glitch” that can be fixed, he said. “The law as passed is solid.”

New Century, the mortgage company that resumed lending in Rhode Island after state regulators pushed back the deadline for compliance, makes home loans in a number of other states with predatory-lending laws, the company’s Loewenthal said, including Ohio, New Jersey, New York and Massachusetts.

Massachusetts, for one, has seen no exodus of mortgage lending since it enacted its predatory-lending law, said Quinn, the Massachusetts’ lawmaker. And he predicted that mortgage companies will eventually resume lending in Rhode Island, too.

“They might have to retool their products,” Quinn said, “but they’re not going to pull out in total.”

larditi@projo.com